It looks like the exuberance over Bank of America (NYSE:BAC) may have gotten a little ahead of itself.
Shares in the nation’s second-biggest bank by assets (after JPMorgan Chase (NYSE:JPM)) more than doubled last year … but, boy, does that feel like a long time ago.
The stock fell as much as 6.8% on heavy volume in early trading Wednesday after the company missed Wall Street’s first-quarter earnings estimate by 2 cents a share.
Falling revenue, lower profits from mortgage banking, a drop in net gains on the sale of debt securities and higher-than-expected non-interest expenses were the main culprits for profit coming up short.
As we saw when JPM and Wells Fargo (NYSE:WFC) reported, income from mortgage banking has been cooling off as the rush to refinance homes at near-record-low rates runs its course. Shrinking net interest margins — the difference between what a bank charges for loans and what it pays on deposits — is no friend to money center banks either.
But where BAC missed, JPM, WFC both beat Street estimates when they posted their own quarterly results earlier this earnings season. Those banks also suffered declining revenues and lower net interest margins, but they more than made up for it and exceeded expectations by taking a bigger hatchet to costs than did BofA.
And that makes Bank of America’s results look all the more lame in relief — a relative performance that the market has been fretting for months now.
True, the steep selloff in BAC was no doubt made worse by the general punishment doled out to all equities Wednesday. The Dow Jones Industrial Average took a triple-digit plunge, after all, and with BAC trading at less than $12, this Dow component was hardly the biggest drag on the price-weighted blue-chip average.
But Wednesday’s shellacking extends a period of volatility and doubt in the stock after a remarkable 2012. Shares have been in the red for most of the year-to-date, swinging in a range of more than 14 percentage points and always lagging the S&P 500.
If last year’s rally was all about BAC showing it could get healthy and survive, those hurdles have been cleared. The bank’s balance sheet is on sound footing, with improved credit quality and capital ratios offering some real positives in the most recent quarter.
Unfortunately for BAC, investors have quite naturally made a change in their expectations, from “show me you can stay afloat” to “show me the growth.” Or at least show me you can cut costs.
So far, the bank has not been able to deliver.
As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.